In a candid acknowledgment, the IMF admitted it had underestimated the damage to growth wrought by budget cutting and urged Europe to ease up on austerity, drawing an indignant rebuff from Germany’s finance minister.
The shift in perceptions about the eurozone is more noticeable in the financial markets than on the streets, where the impact of the sovereign debt crisis will continue to cause ravages for years to come. Public spending cuts and recession are tearing at the fabric of societies from Athens to Madrid, casting many middle-class families and retirees into poverty, and more unemployed and young people into a precarious situation.
The crisis has also changed the balance of power in Europe, giving Germany and its northern European allies a preponderant say in eurozone decisionmaking commensurate with their credit ratings, while making southern states weaker and more dependent.
A two-speed Europe, in which everyone was heading in the same direction at different paces, may now be turning into a two-tier Europe, with the eurozone becoming a tighter inner core with its own budget and stricter rules, while Britain, Sweden and some others form a looser outer circle.
Germany, determined to limit its taxpayers’ liabilities for other eurozone states, has rejected issuing common eurozone bonds or providing a joint bank deposit guarantee.
The German, Dutch and Finnish finance ministers are trying to rule out any retroactive use of eurozone rescue funds, yet Berlin supports the emerging idea of creating a separate eurozone budget to cope with asymmetric economic shocks and its backing for a single banking supervisor will surely open the door to some greater mutualization of risk in the longer term.
As the eurozone becomes a more integrated federal bloc, EU members outside the single currency face awkward choices.
Those such as Poland, Hungary and Latvia that aspire to join the monetary union as soon as possible are trying to hug the eurozone as tightly as possible, demanding seats and votes in a new banking supervisory authority that will take decisions on banks operating on their soil.
Poland tried unsuccessfully last week to lever its way into the inner sanctum of eurozone finance ministers by offering to join a group of EU states launching a financial transaction tax in return for a seat at the table.
It was told only eurozone members could attend the group.
Britain, which has no intention of joining the euro or the banking union, is demanding a right of veto to protect its large financial sector from decisions taken by others, while aiming to use closer eurozone integration as an opportunity to negotiate a loosening of its own European ties.
Sweden, with a pro-euro political establishment that lost a referendum on joining the currency in 2003, seems more uneasy and conflicted about the eurozone moving ahead without it.
All of this means Europe faces a tense period of reshaping that will severely test its Nobel-recognized powers of building peace and prosperity on a fractious continent.